In addition to being risky, investing in Chinese stocks has also been less rewarding over the past few years.

The Shanghai Composite (SHCOMP) plunged nearly 22% last year, making it one of the worst performing global markets of 2011. Stocks in Shanghai have been clawing back gains this year, rising more than 8%, compared with a 9% gain for the S&P 500 (SPX).

Chinese gross domestic product, the broadest measure of economic activity, rose at an annual rate of 8.1% in the first quarter. That was down from 8.9% in the fourth quarter, and below the historical average of around 10% over the last three decades.

"It doesn't surprise us that the Chinese economy looks soft," said Paul Christopher, chief international strategist at Wells Fargo Advisors. "Their biggest customers are the U.S. and Europe."

Investors should also expect some short-term uncertainty as China prepares for a major leadership shift, says Christopher.

On top of that, the Chinese government has been moving away from investments in large-scale infrastructure projects, which could curb the nation's demand for natural resources, he said.

That could prove problematic for U.S. multinationals such as Alcoa (AA, Fortune 500) and Caterpillar (CAT, Fortune 500), which have been riding the wave of construction spending in China over the past few years.

Christopher advises investing in China as part of a diversified portfolio of emerging market stocks. "We wouldn't buy stand-alone China exposure," he said.

However, others argue that worries about a slowdown in China are overblown. They say the Chinese government has the resources it needs to support the economy and is willing to act if conditions deteriorate.

"Investors should remain constructive in China," said Xian Liang, senior China analyst at U.S. Global Investors.

Liang pointed out that China has already lowered reserve requirements for banks twice, signaling that policy makers in Beijing remain focused on "fine-tuning" the economy.

What's more, he said the shift toward more domestic consumption presents an opportunity for investors.

"The consumer is certainly a long-term play," said Liang. "It's an area the government wants to promote."

The Sino-Forest case highlighted concerns about so-called "reverse mergers," a quick and popular way for Chinese companies to trade publicly on U.S. and other international exchanges.

In a reverse merger, a privately held Chinese company typically merges with a publicly traded U.S. company, gaining voting and operational control without the regulatory hurdles that come with a traditional IPO.

And just this week, China-based oil field services company SinoTech (CTESY) was sued by U.S. securities regulators for overstating the value of certain assets in documents linked to its initial public offering.

Given the uncertain economic and political outlook, now is a particularly inauspicious time to be investing in China, cautioned Packard.

"I would be a very careful investor in China," she said. "If you don't know much about China, and you do well there, it means you were very lucky."